CHAPTER
18
Costing Systems:
Job Order Costing
Principles of
Accounting
12e
Needles
Powers
Crosson
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Concepts Underlying Product
Costing Systems
 A product costing system is used to account for
an organization’s product costs and to provide
timely and accurate cost information for pricing,
cost planning and control, inventory valuation, and
financial statement preparation.
- Two basic types of product costing systems have been
developed: job order costing systems and process
costing systems.
- The typical product costing system combines parts of
job order costing and process costing to create a
hybrid system known as an operations costing system.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Job Order and Process Costing Systems
 A job order costing system is used by companies
that make unique or special-order products.
– A job order costing system measures and recognizes the
costs of direct materials, direct labor, and overhead to
a specific batch of products or a specific job order (a
customer order for a specific number of specially
designed, made-to-order products) by using job order
cost cards.
 A job order cost card is usually an electronic or paper
document on which all costs incurred in the production of a
particular job order are recorded and matched with the job’s
revenues.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Job Order and Process Costing Systems
 A process costing system is used by companies that
produce large amounts of similar products or liquid
products or that have long, continuous production runs of
identical products.
– It first traces the costs of direct materials, direct labor,
and overhead to processes, departments, or work cells
and then assigns the costs to the products manufactured
by those processes, departments, or work cells during a
specific period using a process cost report.
 A process cost report is usually an electronic or paper
document prepared every period for each process,
department, or work cell.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Job Order Costing in a Manufacturing Company
 Job order cost cards and cost flows through
the inventory accounts form the core of a
job order costing system.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
A Manufacturer’s Job Order Cost Card
 A manufacturer’s job order cost card typically has
space for direct materials, direct labor, and
overhead costs. It also includes the job order
number, product specifications, customer name,
date of the order, projected completion date, and
a cost summary.
– As a job incurs direct materials and direct labor costs,
its job order cost card is updated.
– Overhead is also posted to the job order cost card at
the predetermined rate.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Computation of Unit Cost
 When a job is finished, the costs of direct
materials, direct labor, and overhead that have
been recorded on its job order cost card are
totaled.
 The product unit cost is then computed.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Job Order Costing in a Service Organization
 Many service organizations use a job order
costing system to compute the cost of rendering
services.
– Job order cost cards are used to keep track of the
labor, materials and supplies, and service overhead
incurred for each job.
– To cover these costs and earn a profit, many service
organizations base jobs on cost-plus contracts, which
require the customer to pay all costs incurred in
performing the job plus a predetermined amount of
profit.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost Allocation
 Cost allocation is the process of assigning a
collection of indirect costs, such as overhead, to a
specific cost object, such as a product or service, a
department, or an operating activity, using an
allocation base known as a cost driver.
– A cost driver might be direct labor hours, direct labor
costs, units produced, or another activity base that has
a cause-and-effect relationship with the cost.
– As the cost driver increases in volume, it causes the cost
pool—the collection of indirect costs assigned to a cost
object—to increase in amount.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Allocating the Costs of Overhead
(slide 1 of 2)
 Step 1: Planning the Overhead Rate—Before a period
begins, managers determine cost pools and cost drivers
and calculate a predetermined overhead rate as follows.
 Step 2: Applying the Overhead Rate—As units of the
product or service are produced during the period, the
estimated overhead costs are assigned to the product or
service using the predetermined overhead rate as follows.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Allocating the Costs of Overhead
(slide 2 of 2)
 Step 3: Recording Actual Overhead Costs—The actual
overhead costs, such as indirect materials, indirect labor,
depreciation, and property taxes, are recorded as they
are incurred during the period.
 Step 4: Reconciling the Applied and Actual Overhead
Amounts—At the end of the period, the difference
between the applied and actual overhead costs is
calculated and reconciled.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Overapplied Overhead
 If the overhead costs applied to production during
the period are greater than the actual overhead
costs, the difference in the amounts represents
overapplied overhead costs.
– If the difference is immaterial, the Overhead account is
debited and the Cost of Goods Sold or Cost of Sales
account is credited by the difference.
– If the difference is material for the products produced,
adjustments are made to the accounts affected—that is,
Work in Process Inventory, Finished Goods Inventory,
and Cost of Goods Sold accounts.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Underapplied Overhead
 If the overhead costs applied to production during
the period are less than the actual overhead costs,
the difference represents underapplied overhead
costs.
– If the difference is immaterial, the entry would be:
- If the difference is material, adjustments are made to
the Work in Process Inventory, Finished Goods
Inventory, and Cost of Goods Sold accounts.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Actual Cost of Goods Sold or Cost of Sales
 The adjustment for overapplied or
underapplied overhead costs is necessary to
reflect the actual overhead costs on the
income statement.
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Allocating Overhead: The Traditional Approach
 The traditional approach to applying overhead
costs to a product or service is to use a single
plantwide overhead rate.
– This approach is especially useful when companies
manufacture only one product or a few very similar
products that require the same production processes
and production-related activities.
– The total overhead costs constitute one cost pool, and a
traditional activity base—such as direct labor hours,
direct labor costs, machine hours, or units of
production—is the cost driver.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Allocating Overhead: The ABC Approach
 Activity-based costing (ABC) is a more accurate
method of assigning overhead costs to products or
services.
– It categorizes all indirect costs by activity, traces the
indirect costs to those activities, and assigns activity
costs to products or services using a cost driver related
to the cause of the cost.
– There will be an activity cost rate for each activity
pool, and managers must select an appropriate number
of activity pools instead of the traditional plantwide
rate for overhead.
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Supporting the Management Process
 Managers use unit cost information throughout the
management process to fulfill the concepts of
planning and forecasting operations, organizing
and coordinating resources and data, and
commanding and controlling the organization’s
resources by:




Planning
Performing
Evaluating
Communicating
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.